Taxes Kill Growth

[FC]

Killing Growth One Hike at a Time

By Investor's Business Daily

 

The upper house of Germany’s parliament voted Friday to lift the value-added tax by three percentage points to 19% — the biggest rise in the VAT’s 40-year history.

The tax hike has gotten little attention due to the fact that it was a conservative leader — Chancellor Angela Merkel — who engineered it. But it’s a bad idea just the same, one that’s likely to hurt Germany. Worse, it will also hurt the rest of Europe, which relies on the German economy to pull it along.

Don’t get us wrong. We have nothing against Germany acting to reduce its deficit. It just shouldn’t do it by taking money away from the private sector and directing it toward government.

What really worries us, though, is that Germany isn’t alone in its prospective tax hiking.

Japan, which has yet to definitively emerge from a 15-year slump, is talking about further huge tax hikes to cover the growing burden of its aging population.

In Britain, Finance Minister Gordon Brown has pushed through increases that will take taxes from 37% of GDP to above 40% by the end of this decade.

And the U.S. is not immune. Congress recently voted to keep President Bush’s tax cuts in place — but only until 2010. After that, they expire and become a de facto tax increase. It’s a recipe for a slowdown.

At the same time that taxes are going up, central banks — from Frankfurt to Washington to Tokyo to Beijing — are raising interest rates or otherwise clamping down on money-supply growth. If this trend of higher taxes and tighter credit continues, it could mean a massive slowdown, if not an outright recession, in the world’s major economies.

We’re not trying to be alarmist. Right now, conditions are very positive. But data show the world is already overtaxed. As a matter of efficiency, countries perform best when government’s tax take is relatively small — about 20% of GDP. Above that level, economies start to suffer. Repeated studies bear this out.

Perhaps the most famous, by Harvard economist Martin Feldstein, found that high rates of taxation cost countries more than $1 in output for each dollar of added taxes imposed. Likewise, World Bank studies of dozens of economies going all the way back to 1983 find pretty much the same thing.

In Europe, the average tax take as a share of GDP — the most transparent measure of taxation — is 39.3%. That’s down from 41.7% in 2000. The U.S., by comparison, was at 25.4% of GDP in 2005. But following recent tax hikes in Germany and Britain that have yet to be fully felt, the EU’s rates might soon rise.

Moreover, the gap between European rates and U.S. rates is widening. This in large part explains the disparity in economic performance (see chart).

In 2000, EU tax rates were 11.8% higher than in the U.S. As of 2004, the gap had grown to 14.6%.

Do such differences mean anything significant?

Well, since 2000, the U.S. economy grew roughly 6% faster than Europe’s. The same story is true

in Japan, by the way, where the tax difference has also shifted in favor of the U.S.

Needless to say, the U.S. shouldn’t join this global move to higher tax rates. Congress should make clear, and soon, that it won’t let rates go up in 2010. And those countries now enacting tax hikes might want to think twice before doing it. Central banks — including the Fed — need to recognize that an awful lot of money is now being taken off the table in the global economy.

If policymakers are wise, we might just keep the world’s economy growing. If not, we might be hit by a double whammy that will make the last global recession pale by comparison.

 

 

 

 

[swamprat]

Got a friend who is a union underwater welder. If he weld's on a Saturday for 4 hour's he has to take Monday and Tuesday off to avoid higher taxes. Were is the benefit to the country here? Work 4 lose 16 in production. If Congress faced a 1% decline in income for every tax raise they voted bet the Bast--d's would think twice.

 

Swamprat

[Guest Guest_karlunity_*]

You need taxes to buy votes.

Old as Sumer.

 

You cannot and never could tax the "Noble" or upper class, nor can you today,

They have tax lawyers and "Foundations" and "loopholes".

That is the nature of social man.

 

Therefore you must tax the "middle-class".(in the old times, this was the yeoman farmer)

 

This protects the upper-class by preventing the Middle-class from keeping enough to become "upper".

After all as the British lady said, "if everyone were in first class, it would no longer be first class".

 

It gives enough to the lower class (social programs) to prevent social revolution.

 

Every body is happy..except the middle-class and they are too tired by the time they get home from work to make any trouble.

 

Karl

[FC]

There's still a cap on taxes, so you can work and still make money, but you'll pay a greater percentage.